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Avoiding the EI tax-hike hammer

By Kevin Gaudet
web posted October 11, 2010

Imagine your neighbour hits you in the head with a hammer, and then says you should be elated that he hit you only once because originally he had planned to hit you three times. This is the kind of argument Finance Minister Flaherty is using to sell his Employment Insurance (EI) tax hike planned for January 1st next year.

In 2008, then Human Resources Minister Monte Solberg made a good policy move by making EI a stand-alone, self-financing fund. Unfortunately, this long overdue move was done just ahead of the recession.  This change mixed with higher unemployment and a myriad of new EI spending caused the EI fund to run a deficit. Tax hikes are the government’s response to this deficit.

The EI deficit is due in part to the government having added $3 billion in new costs to the program by temporarily extending and increasing benefits, while temporarily adding new training programs. While the government does plan to end the temporary spending, it will not be enough to avoid the EI deficit.

Mr. Flaherty is planning to increase EI premiums by a rate of five cents per $100 of earnings for an employee and seven cents for an employer. He says this planned tax hike should elate Canadians because originally he had planned an even larger tax hike of 15 cents for employees and 21 cents for employers.

Only a politician would find this argument compelling. The government would have Canadians believe that there are only two choices; tax hikes or a continued deficit in EI. There is another alternative; reform the plan and stop using it as a slush fund.

EI ought to work like a real insurance program where one pays premiums against times when one needs to draw income between jobs. EI in Canada doesn’t work that way. For those in regions with low unemployment, EI is harder to get and pays less for shorter periods of time. It also funds many programs other than income replacement.

In 2008-09 EI paid out $956 million for skills training; $423 million for job search and counseling services, $246 million for special fishing benefits, $136 million to start self-employed businesses, $87 million in wage subsidies, $49 million in job creation partnerships, $143 million for worker adjustment planning and counseling, $94 million for aboriginal-specific training programs, $56 million to top up work-sharing, $54 million for human resources planning, $38 million for sector councils, $15 million for research on how to better help people find jobs, $1 million for labour market mobility planning and $10 million for youth awareness.

There may be some merit to some of this spending, but it certainly is not ‘employment insurance.’ It is $2.3 billion of social programming funded by EI premiums. It consumes approximately 12 per cent of premiums every year.

Removing only half of this spending from EI would avoid the government’s planned tax hike.

It also merits note that EI costs $1.8 billion just to administer. Perhaps savings might also be found here.

EI increasingly is helping to define the differences between the federal Liberals, Tories and NDP.

The Conservatives want premium hikes. The NDP and Bloc want to increase benefits and make it easier to get. The Liberals want to add a $250 million family care component to the program funded out of general revenue.

Regrettably, all parties’ positions devolve to the usual consequence of costing taxpayers even more. Instead, what is needed for EI is real reform, making it a real insurance program instead of the slush fund it has become. ESR

Kevin Gaudet is the federal director of the Canadian Taxpayers Federation. © 2010, Kevin Gaudet

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